Obama Vows No Negotiations on Debt as Deficit Talks Loom

U.S. President Barack Obama told reporters on Nov. 14, “I am very confident that we can get immigration reform done. My expectation is that we get a bill introduced and we begin the process in Congress very soon after my inauguration.” Photographer: Joshua Roberts/Bloomberg

Jan. 15 (Bloomberg) -- President Barack Obama vowed he
won’t negotiate over raising the government’s debt ceiling even
as he offered to deal on a separate track with the deficit
reduction demanded by Republicans.

Warning of economic calamity and stalled payments to Social
Security recipients, military personnel and government creditors
if the $16.4 trillion debt limit isn’t lifted, Obama accused
Republicans of holding the nation hostage as he sought to push
Congress toward action.

“What I will not do is to have that negotiation with a gun
at the head of the American people,” Obama said at a White
House news conference yesterday, referring to the Republican
linkage of increasing the debt limit with deficit reduction.

“They will not collect a ransom in exchange for not
crashing the American economy,” he said.

Obama and congressional Republicans appear headed toward a
confrontation over the debt limit, deficit reduction and keeping
the government running that will come to a head over the next
six to eight weeks.

The Treasury reached its statutory borrowing limit on Dec.
31 and is using “extraordinary” measures to pay for the
government. Those measures will work only until mid-February to
early March, Treasury Secretary Timothy F. Geithner said in a
letter yesterday to congressional leaders.

By the end of February, lawmakers and the White House also
will have to come up with a plan to avert automatic spending
cuts, which both sides deferred in the year-end budget deal.

Second Deadline

Congress faces an additional deadline at the end of March
to pass legislation to keep the government running at current
funding levels in absence of an annual budget.

Senate Republican leader Mitch McConnell of Kentucky said
the debt ceiling debate is the “perfect time” to address
spending, while House Speaker John Boehner, an Ohio Republican,
brushed off Obama’s insistence on keeping the two separate.

Voters “do not support raising the debt ceiling without
reducing government spending at the same time,” Boehner said in
a statement. He said he plans to discuss his debt-ceiling
strategy with his leadership team when the House of
Representatives returns to Washington this week.

Raise, Lower

Obama maintains that raising the debt limit to pay for
expenses already authorized by Congress is non-negotiable.

The debt limit has been periodically raised since its
creation in 1917, when Congress and President Woodrow Wilson
approved a measure enabling the Treasury to issue long-term
securities to help finance entry into World War I. Congress
increased it to reflect the cost of World War II, and lowered
the level after the war ended. Since 1960, Congress has raised
or revised the ceiling 79 times, including 49 times under
Republican presidents, according to the Treasury Department.

While Obama expressed his willingness to negotiate on
deficit-reduction measures, he called threats to let the
government default on bills already accrued by failing to raise
the debt limit “irresponsible” and “absurd.”

When partisan gridlock brought the government to the brink
of default in August 2011, the stock market fell and Standard &
Poor’s cut the nation’s credit rating.

Still, U.S. Treasury bond investors -- who most directly
bear the risk of a government default -- haven’t shown alarm
over political fights that continually are resolved.

Treasury Yields

Yields on 10-year U.S. Treasury notes declined from 2.96
percent on July 22 to 2.56 percent on Aug. 5, 2011, the day of
the S&P downgrade. Yields continued to fall, reaching 1.72
percent on Sept. 22 of that year.

As another debate over the debt limit resumes in
Washington, the 10-year yield was down two basis points, or 0.02
percentage point, to 1.82 percent at 8:26 a.m. today in New
York, according to Bloomberg Bond Trader prices.

The Standard & Poor’s 500 Index is up 3.1 percent this year
after rising 13.4 percent last year. The prospect of slower
Apple Inc. iPhone sales was a bigger driver than Washington’s
fiscal debate yesterday as the S&P 500 lost less than 0.1
percent to 1,470.68 at 4 p.m. in New York.

As part of a White House strategy to explain the debt-ceiling debate to the public as a matter of covering costs
already incurred, Obama compared it to eating out at a
restaurant and then not paying the check.

“Now, if Congress wants to have a debate about maybe we
shouldn’t go out to dinner next time, maybe we should go to a
more modest restaurant, that’s fine,” Obama said. He referred
26 times to the U.S. “paying its bills.”

Conference Call

Geithner, National Economic Council Director Gene Sperling
and senior Obama adviser Valerie Jarrett held a conference call
yesterday with more than three dozen business leaders to discuss
the president’s deficit-reduction plans, according to a White
House official. Participants included Goldman Sachs Group Inc.
Chief Executive Officer Lloyd Blankfein, AT&T Inc. CEO Randall
Stephenson and Xerox Corp. CEO Ursula Burns, said the official,
who asked not to be named in describing the call.

Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said Obama is “putting the
warning out there to get Congress to move on this, but we doubt
there will be an agreement before the last minute,” as was the
case with the budget deal reached Jan. 1.

“It’s not an exaggeration to say the markets might go
haywire,” Rupkey said. “But the markets went through delay and
downgrade before in August 2011. Knowing what to expect means
the market may have discounted a bad outcome. You can fool the
market once but rarely twice. I get the feeling even a default
would be viewed as technical.”

‘Severe’ Turmoil

Mark Zandi, chief economist at Moody’s Analytics Inc. in
West Chester, Pennsylvania, said that for now, investors
anticipate an agreement if only because “the financial and
economic turmoil would be so severe it is hard to see how
Washington would quickly fail to come to terms on the debt
ceiling.”

Tony Fratto, a former White House and Treasury spokesman
during President George W. Bush’s administration, said Obama is
starting from a position of relative strength.

“I believe him when he says he’s not going to negotiate
straight-up on the debt ceiling, and if I were in the White
House I’d be advising the same thing,” Fratto said.

Fratto said Republicans’ response may be to tie the debt
ceiling to the showdown over funding the government or present
Obama with “an offer he can’t refuse,” such as some of the
spending cuts he’s entertained, such as the changing the way
inflation is calculated for Social Security benefits.

“Congress has no choice but to raise the debt ceiling,”
Fratto said. “It’s an uncomfortable place for Republicans to
be, but that’s the way it is.”